Rating Rationale
June 14, 2022 | Mumbai
SHK Chemtech Industries LLP
Rating upgraded to 'CRISIL BB/Stable'; 'CRISIL A4+' assigned to bank debt; rated amount enhanced for bank debt
 
Rating Action
Total Bank Loan Facilities RatedRs.50 Crore (Enhanced from Rs.26.5 Crore)
Long Term RatingCRISIL BB/Stable (Upgraded from 'CRISIL BB-/Stable')
Short Term RatingCRISIL A4+ (Assigned)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of SHK Chemtech Industries LLP (SHK) to ‘CRISIL BB/Stable’ from ‘CRISIL BB-/Stable’, while assigned its ‘CRISIL A4+’.rating to the short term bank facility.

 

The upgrade reflects strong ramp-up in sales and overall operating performance in fiscal 2022, the first full year of commercial operations. Operating performance is expected to continue to improve in the near-to-medium term, backed by enhanced capacity and healthy demand. SHK commenced commercial operations in November 2020 and achieved revenue of Rs 61 crore in fiscal 2021. The firm has been able to successfully ramp up its operations, registering revenue of around Rs 186 crore in fiscal 2022. It has also enhanced its ethyl acetate manufacturing capacity by almost 50%, which will further aid revenue growth. However, the firm is undertaking large, debt-funded capital expenditure (capex) for establishing an ethanol distillery unit over the coming fiscals. Completion of the project and availability of funding in a timely manner will be key monitorables.

 

The ratings continue to reflect the extensive experience of the partners in the chemicals and sugar-based ethanol industry and the increasing scale of operations and adequate debt protection metrics of SHK. These strengths are partially offset by moderately high gearing, susceptibility to volatility in raw material prices and exposure to project-related risks.

Analytical approach:

Unsecured loan of Rs 5.01 crore provided by the partners as on March 31, 2021, has been treated as neither debt nor equity, as the amount will be maintained in the business over the medium term.

Key rating drivers and detailed description

Strengths:

  • Extensive experience of the partners: The 25-year-long experience of the partners, their strong understanding of the market dynamics and healthy relationships with suppliers and customers will continue to support the business. Quick ramp-up in sales is also supported by the experienced management team.

 

  • Increasing scale of operations: The firm has been successfully able to ramp up its operations in a short span of time, as reflected in revenue of around Rs 186 crore in fiscal 2022, the first full year of commercial operations. The scale is expected to increase further over the medium term, aided by the recent capacity addition and rising demand for the firm’s products. Operating profitability is expected  at around 5% over the medium term.

 

Debt protection metrics are estimated to have improved in fiscal 2022, driven by higher cash accrual. Interest coverage and net cash accrual to total debt ratios are estimated at 2.4 times and 0.14 time, respectively, in fiscal 2022. Backed by improvement in operating performance, the metrics should remain adequate over the medium term.

 

Weaknesses:

  • Average capital structure: Networth is estimated at an average Rs 11.16 crore as on March 31, 2022, while gearing was high at 2.63 times on account of the early stages of operations and debt contracted for the firm’s project. The capital structure is expected to remain leveraged over the medium term because of large incremental working capital requirement and debt-funded capex.

 

  • Exposure to project-related risks: The firm plans to undertake an ethanol distillery project of Rs 75 crore over the next two fiscals, which shall be funded in a debt-to-equity ratio of 3:1. The project is early stages, and hence, the firm remains exposed to various risks related to the large project.

 

  • Susceptibility to volatility in raw material prices: The availability and prices of the key raw material, special denatured spirits, prepared from molasses, are seasonal and susceptible to availability of sugarcane. Both profitability and revenue are likely to remain susceptible to volatility in raw material prices.

Liquidity: Adequate

Net cash accrual, expected at Rs 7-8.5 crore per annum, will comfortably cover yearly debt obligation of Rs 3.6 crore over the medium term. Bank limit utilisation averaged 51% over the 12 months through March 2022. Current ratio was moderate at 1.32 times as on March 31, 2022. Liquidity is further supported by unsecured loans from the partners.

Outlook: Stable

SHK will continue to benefit from the partners’ extensive experience and healthy relationships with clients.

Rating sensitivity factors

Upward factors

  • Strong ramp-up in sales and higher-than-expected operating profitability leading to net cash accrual of over Rs 10 crore per annum on a consistent basis
  • Improvement in the financial risk profile, especially the capital structure

 

Downward factors

  • Lower-than-anticipated revenue and/or profitability leading to net cash accrual to debt obligation ratio of less than 1 time
  • Stretch in the working capital cycle or larger-than-anticipated debt-funded capex weakening the capital structure and liquidity

About the firm

Established in 2018, SHK is setting up a plant to manufacture ethanol and ethyl acetate in the Latur district of Maharashtra. The plant commenced operations in November 2020. SHK is owned and managed by Mr Prathmesh Kocheta, Ms Ananda Kocheta and other partners.

Key financial indicators

As on / for the period ended March 31

 

2021

2020

Operating income

Rs crore

61.51

0.00

Reported profit after tax (PAT)

Rs crore

0.30

-0.01

PAT margin

%

0.5

-

Adjusted debt/adjusted networth

Times

2.13

-

Interest coverage

Times

2.01

2.13

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of instrument(s)

ISIN

Name of instrument

Date of

allotment

Coupon
rate (%)

Maturity

date

Issue size
(Rs crore)

Complexity levels

Rating assigned 

with outlook

NA

Letter of Credit

NA

NA

NA

16.9

NA

CRISIL A4+

NA

Proposed Working Capital Facility

NA

NA

NA

3.6

NA

CRISIL BB/Stable

NA

Term Loan

NA

NA

Mar-27

14.5

NA

CRISIL BB/Stable

NA

Working Capital Facility

NA

NA

NA

15

NA

CRISIL BB/Stable

 

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 33.1 CRISIL BB/Stable   -- 24-06-21 CRISIL BB-/Stable 31-03-20 CRISIL B+/Stable   -- --
Non-Fund Based Facilities ST 16.9 CRISIL A4+   --   --   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Letter of Credit 16.9 Bank of Maharashtra CRISIL A4+
Proposed Working Capital Facility 3.6 Not Applicable CRISIL BB/Stable
Term Loan 14.5 Maharashtra Gramin Bank CRISIL BB/Stable
Working Capital Facility 12 Maharashtra Gramin Bank CRISIL BB/Stable
Working Capital Facility 3 Maharashtra Gramin Bank CRISIL BB/Stable

This Annexure has been updated on 14-Jun-22 in line with the lender-wise facility details as on 14-Jun-22 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition

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